Gifted Kids or Pushy Parents? Foreign Direct Investment and Plant Productivity in Indonesia

This paper uses micro data from the Indonesian Census of Manufacturing to analyze the causal relationship between foreign ownership and various aspects of plant performance. It examines the implications of foreign ownership in three different contexts: entry of foreign investors through greenfield projects, foreign acquisitions and foreign privatizations. To control for the possible endogeneity of FDI decision propensity score matching is combined with a difference-in-differences approach when the latter two settings are considered. The results suggest that new greenfield entrants outperform new domestic producers in terms of productivity. They also tend to be larger, more capital intensive and more involved in international trade. Further, the findings indicate that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in subsequent periods. After three years, the acquired plants exhibit a 13.5 percent higher productivity than the control group. The rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports. Finally, productivity improvements and evidence of restructuring are also found in the context of foreign privatizations.